As we look forward to 2025, many workers are gearing up for a disappointing reality – a smaller annual raise. According to a recent poll by WTW, a consulting firm, the typical worker can expect a 4.1% pay raise next year, down from 4.5% in the current year. This decrease comes as a surprise to many, given the rapid growth in worker pay over the past two years.
Factors Influencing Pay Raises
Lori Wisper, WTW’s work and rewards global solutions leader, highlighted that the size of workers’ salary increases is primarily influenced by the supply and demand of labor. Affordability and industry dynamics also play a role, but to a lesser extent. The demand for workers reached unprecedented levels in 2021 and 2022, driven by the rollout of Covid-19 vaccines and the reopening of the U.S. economy.
During this period, a trend known as the “great resignation” emerged, with more than 50 million people quitting their jobs in 2022 – a record number. Companies were forced to raise salaries and offer incentives like signing bonuses to attract and retain talent in a highly competitive job market. However, as we transition into 2025, the job market has cooled significantly. Hiring, job openings, and quits have declined, leading to an increase in the unemployment rate.
As a result, almost half of U.S. organizations anticipate lower salary budgets for 2025. With fewer job openings and less competition for talent, companies may feel less pressured to offer higher salaries. This shift reflects a return to more normal circumstances, resembling the job market of 2018 and 2019.
Balancing Inflation and Buying Power
After two years of declining buying power due to high inflation, workers are finally seeing a slight relief in recent months. The easing of pricing pressures has helped boost workers’ purchasing power. While the projected 4.1% raise for 2025 may be smaller than the previous year, it still exceeds the median annual pay raise of around 3% seen in the years following the 2008 financial crisis.
Unprecedented Growth and Future Expectations
The significant jump in salary growth during the pandemic era, reaching over 4%, is a notable deviation from historical trends. Wisper noted that salary growth typically falls rather than rises, making the recent years of high annual raises exceptional. The unexpected nature of this growth, coupled with the changing dynamics of the job market, has paved the way for a more cautious approach to compensation in the upcoming year.
The shifting landscape of the job market has created a ripple effect on worker compensation. From the boom in salaries during the pandemic to the current cooling off period, workers and companies alike are bracing for a new reality in 2025. As we navigate through these changes, adaptability and flexibility will be key in ensuring a stable and sustainable workforce.